What is an Advance Pricing Agreement (APA)?
An Advance Pricing Agreement (also known as an APA) is an agreement between a Taxpayer (known as assessee) and tax authority of the country regarding ascertainment of the arm’s length price for future intercompany transactions with its Associated Enterprises for the upcoming years in advance.
The power to issue an Advance Pricing Agreement in India lies with the Central Board of Direct Taxes (CBDT) with prior approval of the Central Government.
Generally, APA service assists in defining the Arm's Length Price for a covered International Transaction.
There are three types of Advance Pricing Agreement:
1. Unilateral Advance Pricing Agreement
2. Bilateral Advance Pricing Agreement
3. Multilateral Advance Pricing Agreement
The Judgement or Decision of Advance Pricing Agreement is binding on
1. Assessee/ Taxpayer/ Applicant
2. Income Tax Department (Up to Level of Principal Commissioner of IT/ Commissioner of IT)
The Central Government of India introduced the concept of Advance Pricing Agreement provision under the Income Tax Act, 1961 w.e.f. 1st July 2012. Through this concept introduced under section 92CC and 92CD of the Income-tax Act, 1961, consistency in the legal framework could be envisaged.
The implementation scheme of the Advance Pricing Agreement is inserted by the Central Board of Direct Taxes (“CBDT”) via Rule 10F to Rule 10T and Rule 44GA in the Income Tax Rules, 1962 on 30th August 2012.
The CBDT has the full authority to declare an Advance Pricing Agreement as void-ab-initio if they find out that the assessee has entered APA by misrepresentation of facts or circumstances involving fraud.
The provision of rollback in the Advance Pricing Agreement scheme was introduced through introducing sub-section 9A u/s 92CC through the Finance Act, 2014, and accordingly relevant rules, i.e., 10MA and 10RA were notified on 14th March 2015.
Advance Pricing Purpose/Objective:
The provisions of the Advance Pricing Agreement inserted serve the following purposes,
- To provide certainty and comfort to the assessee to predict the possible outcomes concerning transfer pricing practices.
- To provide an additional remedy under Income Tax Act to a specific type of assessee dealing in International Transaction.
- Efficient resolution of disputes
- To eliminate the risk of double taxation through Bilateral Advance Pricing Agreement.
- To avoid the burden of record-keeping by providing some relaxation on maintenance of documentation.
- No need for a full-scale Transfer-pricing Audit, just a compliance Audit to check whether the terms and conditions of Advance Pricing Agreement are fulfilled or not.
- To bring down tax litigation and to provide tax certainty mainly to foreign Investors.
- To minimal tax litigation and disputes on account of Transfer Pricing.
- To provide a unanimity approach while determining Arm’s Length Price (ALP) of taxpayer’s International Transaction.
Application Procedure for Advance Pricing Agreement
In general, an APA can be entered into for a term of five consecutive years, though it can be renewed later before expiring of existing APA.
- To initiate a request for entering APA, the taxpayer is required to furnish an application in Form 3CED to appropriate tax authority depending on the type of APA.
- Along with the application, proof of requisite fees in triplicate (3 Copies) for entering into Advance Pricing Agreement must be filed to Director General of Income Tax/ Competent Authority as the case may be.
- Before requesting an APA, the assessee has the option to seek consultation with the Director-General of Income Tax (International Tax) related to Transfer Pricing issues.
- Subsequently, the process of negotiation starts between the assessee and the appropriate tax Authority.
- In most cases, taxpayers apply for an advance pricing agreement at least a year before they plan on entering a heavy transaction with their associated enterprises.
- The assessee has an option to roll back the applicability of the Advance Pricing Agreement entered through the rollback provisions
Time Limit for filing an application:
|In case of Non-recurring Transaction
||Before the First Day of the Previous Year.
|In case of Recurring Transaction
||Before the First Day of the Previous Year.
Fee for filing an application of Advance Pricing Agreement
|Value to the transaction for which APA is proposed
|Less than INR 100 Crores
||INR 10 Lakhs
|More than INR 100 Crores but upto INR 200 Crores
||INR 15 Lakhs
|More than INR 200 Crores
||INR 20 Lakhs
Rollback Provision: Under the rollback provision, the assessee has an option to cover the previous four years under the APA subject to specific terms and conditions mentioned thereunder.
Terms and Condition for Rollback:
- Essential Condition: No APA = No Rollback. This means without an approved Advance Pricing Agreement, rollback provisions cannot be made applicable.
- The transaction must be of similar nature as that entered under the APA.
- The rollback facility is available for four previous years except for the following two conditions. 1) The Return of Income (ROI) was not filed u/s 139(1) 2) The assessee failed to furnish the report of CA under Form 3CEB,
- If a case is pending in ITAT under Question of Fact and judgement of ITAT is declared, then no rollback will be available for that year.
- If rollback income is less than the income filed in the Income Tax Return, then, rollback provisions will not be applicable.
- The applicant must make an application seeking Rollback in Form 3CEDA.
Key things to keep in mind while applying for Advance Pricing Agreement
- If Applicants admit to having a Permanent Establishment (PE), a request can be made for PE profit acknowledgment.
- The transaction which is connected intrinsically will also cover under the same and fees calculated thereon accordingly.
- Applicant can withdraw the application in Form 3CEE any time before the finalization of the APA. However, the fees payable will not be refunded in any circumstances.
- Applicant must submit an Annual Compliance Report in Form 3CEF to DGIT in quadruplicate (4 Copies) for each year covered under the Advance Pricing Agreement.